Share of sovereign funds at a high

The overall FPI equity holdings have declined by ~46,000 crore in January alone

The share of sovereign wealth funds (SWFs), as a proportion of total foreign portfolio investments in Indian equities, is at its highest for the current fiscal at 5.74 per cent. However, the value of their investment was ~1.54 trillion as of January; lower than the ~1.56 trillion in December. It is also lower than the ~1.7 trillion as of August.

The reason for the higher share, despite declining absolute holdings, is the overall decrease in foreign investor holdings. SWFs are considered to be more stable than other sources of foreign investment such as hedge funds. It typically consists of long-term capital set up and managed by sovereign governments, to meet future needs.

The overall foreign portfolio investors’ equity holdings have declined by over ~46,000 crore in the last month alone. The reason could be a combination of selling and a decline in valuation of stocks that foreign investors hold themselves. The broader market has seen significant decline, despite the Sensex being around the 36,000-level.

Deven Choksey, managing director of KRChoksey Investment Managers, said markets appear rattled following a sell-off in pledged shares by institutions, leading to sharp falls in smaller firms. This has created issues of confidence in the market…though fundamentals are good, according to him. This would mean that SWFs are likely to be selective, sticking to liquid stocks. Less stable sources of foreign funds may not come in until the market stabilises, Choksey added.

“The long-only funds are not an issue; everybody seems to be quite positive on the fundamentals,” he said.

“SWFs invest with long-term horizons, like 30 years. Several stocks, except for the top 8-10, have corrected 20-70 per cent. These stocks may not be available for buying at these levels if election results are favourable. SWFs might have seen the correction as buying opportunities, which is the reason their share in overall FPI investments has remained more or less intact,” said U R Bhat, Director at Dalton Capital Advisors.

A Morgan Stanley Asia Emerging Market Equity Strategy report on January 31 suggested there may be gains in emerging markets (EMs). The foreign brokerage house has an overweight reading on India, among other markets.

“Our ‘Clouds to Clear’ thesis is starting to pan out with strong YTD (year-todate) gains in EMs on reversing headwinds and better valuations. But fundamental weakness – particularly in IT (Information Technology) Hardware – will be slow to abate, and clarity on trade negotiations as well as Chinese fiscal policy settings may not come until March,” said the note, authored by analysts including Jonathan Garner.

Deviation from the ‘easy money policies’ followed by global central banks, especially in the US, will be a key determinant of how the future pans out, according to an HDFC Securities monthly strategy report on February 4. “The likely end of the Fed’s tightening cycle, and the stabilisation of the US dollar, will be extremely favourable developments for EMs, as would be a fall in geopolitical tensions or a scenario of slowdown without recession,” it said.